The United States District Court for Connecticut permanently enjoined the Banking Commissioner of the State of Connecticut from directly or indirectly regulating the mortgage lending and deposit-related activities of State Farm Bank, F.S.B. or any exclusive agents of State Farm Bank. State Farm Bank, F.S.B. v. Burke, Case No. 3:05CV808 (JBA), 2006 WL 1728919 (D. Conn. June 21, 2006). The court also enjoined the commissioner from requiring that exclusive agents of State Farm Bank be licensed in order to sell mortgage-related products and/or registered to sell certificates of deposit. In reaching its decision the court accorded the Office of Thrift Supervision’s interpretation concerning the preemptive effect of OTS regulations controlling weight.

The case involved State Farm Bank, a federal savings association, that markets and sells various deposit and loan products, such as mortgages and CDs through a network of exclusive agents. State Farm Bank’s agents typically provide information to customers regarding State Farm Bank’s products and services and provide ministerial assistance to customers in completing and submitting applications to State Farm Bank, but do not evaluate loan applications, apply underwriting criteria, make lending decisions or accept loan payments or deposits on behalf of State Farm Bank. Each agent is required to enter into an exclusive agency agreement with State Farm Bank, which provides that “the relationship between the bank and the agent is that of a company and an independent contractor.” Agents participate in State Farm Bank in-house education and training programs and are subject to State Farm Bank oversight and compliance programs, but are responsible for their own office overhead expenses.

The commissioner contended that the agents are subject to Connecticut laws regulating the activities of mortgage brokers and the marketing of CDs.

In response to an inquiry by State Farm Bank, the OTS concluded in an opinion letter that when State Farm Bank uses its agents to perform marketing, solicitation and customer service activities related to deposit and loan products and services and other authorized banking powers, state licensing and registration requirements that do not apply to State Farm Bank also do not apply to State Farm Bank’s agents solely because they perform those activities for State Farm Bank. The OTS premised its analysis of the preemption of state regulation of State Farm Bank’s agents on its understanding that it has plenary authority over federal savings associations and their operations based on federal statutes.

The court found that because the interpretation of the preemptive effect of OTS regulations as articulated in the OTS opinion letter is neither plainly erroneous nor inconsistent with the underlying regulations, the interpretation was entitled to “controlling weight” and concluded that OTS regulations preempt the Connecticut banking statutes as applied to the lending and deposit related activities of State Farm Bank’s exclusive agents.

Elizabeth Anstaett and Darrell Dreher